As a business descends into financial distress, it commonly enters into discussions with its creditors concerning a viable path forward to stave off a bankruptcy filing or liquidation. Either as the first step in a series of agreements or as part and parcel of a larger out-of-court restructuring, creditors often agree to forbear from pursuing collection remedies against the company or the collateral for a period. In return, the company may transfer money or property to the creditorstransfers that may or may not reduce the company’s obligationsor incur additional debt. If, in a subsequent bankruptcy proceeding, the estate representative sues a given creditor for a fraudulent transfer based on the receipt of the money or property or a fraudulent incurrence of the additional obligation, then the creditor may well defend by claiming that the forbearance provided “value” to the debtor. Perhaps in conjunction with other benefits received by the debtor, the creditor will argue that it gave “reasonably equivalent value” and thus may defeat the fraudulent transfer action. In the resolution to that litigation, the creditor’s liability may turn on whether and to what extent a court ascribes value to the forbearance. Below we discuss the legal and financial framework for addressing that question.
The Legal Introduction
Section 548(a)(1)(B) of the Bankruptcy Codethe constructive fraudulent transfer sectionstates in relevant part that a
trustee may avoid any transfer…of an interest of the debtor in property, or any obligation…incurred by the debtor, that was made or incurred on or within 2 years before the date of the filing of the petition, if the debtor voluntarily or involuntarily…received less than a reasonably equivalent value in exchange for such transfer or obligation and…was insolvent on the date that such transfer was made or such obligation was incurred, or became insolvent as a result of such transfer or obligation….1
